December was a vibrant month for real estate sales in London and I have to admit being taken by surprise. Are we not facing record unemployment rates and a huge trade deficit? Perhaps the unemployment benefits have not yet expired? Low interest rates, the rush to beat the Harmonized Sales Tax (HST) and of course people like me, qualifying buyers that can’t qualify at their local bank branch, have added to the stimulus, but what happens when interest rates increase, as Finance Minister Jim Flaherty has suggested in the third quarter of 2010? He is also considering reducing amortization periods and increasing the down payment required on homes if the housing market shows excessive demand.
The Chamber of Commerce is already predicting a 3% increase in the prime rate by the end of 2011. What would that mean to buyers and those needing to refinance? At today’s prime rate of 2.25% it would cost $1,275 to carry a $300,000 home with an amortization of 25 years and a 5 per cent down payment. By comparison, a 5.25% mortgage rate would mean the $300,000 home would now cost $1,745 every month, or an additional $470 per month. That’s a lot of extra money to be shelling out, especially if you’re not expecting rate increases. Not only will mortgage rate increases reduce the number of potential buyers able to qualify, rate increases of this magnitude will create a greater supply of homes for sale, that owners quite simply, no longer can afford. Some analysts estimate as many as 10 per cent of households risk losing a home if the Bank of Canada rate rises to just 4.5 per cent. So how does this all affect you? Will the housing market collapse? Just how bad will it be? Will you be searching for a new career?
The cost of carrying a mortgage will absolutely shoot higher in the next few years. Nothing is more certain, so let’s get you prepared. On the other hand I see nothing in our future that suggests a rapid increase. Our dollar will be at par, so manufacturing will still be suffering. The U.S. economy will continue to be a mess, with wars to fund and a massive deficit. What exactly is Jim Flaherty seeing as this economic boom that will require higher interest rates to control inflation?
Please let me know your thoughts as your insights would be appreciated. Also there is no need to change careers, as the sharp realtors do just fine in every market… as do the sharp money guys.
My thoughts are to think positive not negitive as you have written here. People need to buy or sell just about every day of the week whether it is to downsize, upsize, divorse, death or another baby on the way. That is what keeps our business going.
Dear Ann:
I agree. The media looks for the negative in a story all the time and sometimes it is difficult to separate the fact from the fiction or the logic from the hype. It is an exciting time to be in real estate.
Good Point. I certainly don’t see any adjustment in the immediate future that will have a significant impact on the market – I think we are going to have a very busy year and i look forward to doing business with you at some point in 2010. Take care and thanks for the post – I enjoyed it.
Thanks for the article. I realize that Toronto real estate market is rockin, but the London market is still down 5-8% depending what part of the city you are in. The time on the market is crowding 90 days. We had 400+ sales in December — a wonderful month–except two years ago it was 900 sales. Someone is sniffing something that i want to try.